Investors pull bns out of US treasuries — and into corporate debt

Investors are reallocating USD bns from US Treasuries to US and European corporate debt, as government debt progressively looks relatively weaker, Bloomberg reported. However, the shift is happening slowly, as US Treasuries still hold a steadier performance than corporate bonds, even after the April tariff announcement which pulled both of their prices down. Foreign demand for Treasuries remained resilient, with holdings climbing in May.

By the numbers: Money managers cleared USD 3.9 bn from the US treasuries last month, while putting USD 10 bn into European and US investment-grade corporate debt, according to EPFR Global data. Meanwhile, investors poured another USD 13 bn into US high-grade corporates in July alone, the largest net client purchasing on record since 2015, according to a note from Barclays strategists.

The rationale: If the US fiscal deficits continue to expand as a result of tax cuts and growing interest costs, the government could end up borrowing more, making Treasuries riskier and company debt relatively safer.

A key catalyst for the sentiment shift is Moody’s Ratings, after it lowered the US government rating to Aa1 in May from AAA, citing the impact of growing deficit and rising interest. Interest payments will eat up some 30% of revenue by 2035, compared to 18% in 2024 and 9% in 2021, the agency noted that. The next decade could see US deficits increase by some USD 3.4 tn, on the heels of the Trump administration’s tax cuts, according to the Congressional Budget Office.

MEANWHILE- Corporates are posting robust performance despite warnings, with established companies having the ability to pay interest from yielding earnings. More US companies are exceeding analysts’ expectations compared to the same period last year. “What we’ve seen on the government fiscal side is not great news. Corporates seem to be chugging along nicely,” Jason Simpson, senior fixed income SPDR ETF strategist at State Street Investment Management, told Bloomberg.

Corporate bonds still possess some risks: The high demand for corporate bonds has driven their prices up and their yields down, a reason money managers tend to be cautious. Corporate bond spreads are currently too tight to make them attractive, according to Dominique Braeuninger, a multi-asset fund manager at Schroders Investment Management.

MARKETS THIS MORNING-

Asian markets are mixed this morning, as anticipation for news on a US-China trade agreement is at an all-time high with the August 12 deadline approaching. Hong Kong’s Hang Seng is up 0.9%, while Japan’s Nikkei is down 0.8%. Meanwhile, Wall Street futures are indicating a strong open following the trade agreement with the EU.

THE CLOSING BELL-

The ADX rose 0.4% on Friday on turnover of AED 1.1 bn. The index is up 10.0% YTD.

In the green: National Bank of Umm Al Qaiwain (+10.0%), Bank of Sharjah (+4.9%) and Abu Dhabi National Takaful Co. (+4.9%).

In the red: Commercial Bank International (-2.8%), Waha Capital Company (-2.4%) and National Corporation for Tourism and Hotels (-1.9%).

Over on the DFM, the index rose 0.6% on turnover of AED 855.9 mn. Meanwhile, Nasdaq Dubai was up 0.9%.